UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2001
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8712
BOWATER INCORPORATED
---------------------
(Exact name of registrant as specified in its charter)
Delaware 62-0721803
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 East Camperdown Way, P.O. Box 1028, Greenville, SC 29602
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(864) 271-7733
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of November 5, 2001.
Class Outstanding at November 5, 2001
------ -------------------------------
Common Stock, $1.00 Par Value 54,643,748 Shares
BOWATER INCORPORATED
I N D E X
Page
Number
------
PART I FINANCIAL INFORMATION
1. Financial Statements:
Consolidated Balance Sheet at September 30, 2001,
and December 31, 2000 3
Consolidated Statement of Operations for the Three
and Nine Months Ended September 30, 2001, and
September 30, 2000 4
Consolidated Statement of Capital Accounts
for the Nine Months Ended September 30, 2001 5
Consolidated Statement of Cash Flows for the
Nine Months Ended September 30, 2001, and
September 30, 2000 6
Notes to Consolidated Financial Statements 7-14
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-24
3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II OTHER INFORMATION
Exhibits and Reports on Form 8-K 25-26
SIGNATURES 27
2
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED, IN MILLIONS OF US DOLLARS)
September 30 December 31,
2001 2000
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 15.8 $ 20.0
Marketable securities 0.4 0.4
Accounts receivable, net 464.1 380.8
Inventories 252.0 161.9
Other current assets 41.1 52.5
----------------- -----------------
Total current assets 773.4 615.6
----------------- -----------------
Timber and timberlands 261.1 265.2
Fixed assets, net 3,819.2 2,981.1
Notes receivable - 146.0
Goodwill 848.9 866.8
Other assets 152.8 129.4
----------------- -----------------
$ 5,855.4 $ 5,004.1
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 128.1 $ 141.4
Short-term bank debt 1,009.5 485.0
Accounts payable and accrued liabilities 417.7 314.7
Income taxes payable 4.3 -
Dividends payable 10.1 10.3
----------------- -----------------
Total current liabilities 1,569.7 951.4
----------------- -----------------
Long-term debt, net of current installments 1,232.3 1,304.7
Other long-term liabilities 332.2 319.2
Deferred income taxes 593.5 508.1
Minority interests in subsidiaries 86.7 123.6
Commitments and contingencies - -
Shareholders' equity:
Common stock, issued 66,238,911 and 61,913,626 at September 30, 2001
and December 31, 2000, respectively 66.2 61.9
Exchangeable shares, outstanding and held by non-affiliates
2,045,669 and 1,304,541 at September 30, 2001 and
December 31, 2000, respectively 97.8 63.5
Additional paid-in capital 1,566.0 1,367.1
Retained earnings 833.2 809.6
Accumulated other comprehensive income (loss) (35.8) (18.0)
Treasury stock, at cost (486.4) (487.0)
----------------- -----------------
Total shareholders' equity 2,041.0 1,797.1
----------------- -----------------
$ 5,855.4 $ 5,004.1
================= =================
See accompanying notes to consolidated financial statements
3
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, in millions of US dollars except per share amounts)
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Sales $ 558.8 $ 671.8 $ 1,748.9 $ 1,842.4
Cost of sales, excluding depreciation, amortization and
cost of timber harvested 393.9 402.3 1,155.1 1,150.5
Depreciation, amortization and cost of timber harvested 77.0 74.7 228.6 217.0
Distribution costs 38.9 43.8 120.1 127.2
Selling and administrative expense 31.1 32.5 77.1 86.8
Net gain on sale of assets 4.3 0.1 83.5 3.4
--------- --------- ----------- -----------
Operating income 22.2 118.6 251.5 264.3
Other expense (income):
Interest income (1.0) (4.0) (7.6) (11.7)
Interest expense, net of capitalized interest 33.7 36.1 102.7 98.8
Other, net (11.6) 2.3 (5.7) 8.1
--------- --------- ----------- -----------
21.1 34.4 89.4 95.2
--------- --------- ----------- -----------
Income before income taxes and minority interests 1.1 84.2 162.1 169.1
Provision for income tax expense (1.2) 31.8 69.2 65.9
Minority interests in net income of subsidiaries 4.1 2.4 38.4 2.3
--------- --------- ----------- -----------
Net income (loss) (1.8) 50.0 54.5 100.9
Other comprehensive income (loss):
Foreign currency translation adjustments (2.3) (0.4) (2.6) (1.3)
Unrealized loss on hedged transactions, net of taxes (14.0) - (15.0) -
Minimum pension liability adjustments, net of taxes - - (0.2) -
--------- --------- ----------- -----------
Comprehensive income (loss) $ (18.1) $ 49.6 $ 36.7 $ 99.6
========= ========= =========== ===========
Basic earnings (loss) per common share*: $ (0.04) $ 0.97 $ 1.05 $ 1.92
========= ========= =========== ===========
Diluted earnings (loss) per common share*: $ (0.04) $ 0.96 $ 1.05 $ 1.90
========= ========= =========== ===========
* Basic and diluted earnings per share are based on net income and do not
include any impact from "Other comprehensive income (loss)." See Footnote 9.
See accompanying notes to consolidated financial statements
4
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
For the Nine Months Ended September 30, 2001 (Unaudited, in
millions of US Dollars except per share amounts)
Accumulated
Additional Other
Common Exchangeable Paid-in Retained Comprehensive Treasury
Stock Shares Capital Earnings Income (Loss) Stock
------ ------------ ---------- -------- ------------- --------
Balance at December 31, 2000 $ 61.9 $ 63.5 $ 1,367.1 $ 809.6 $ (18.0) $ (487.0)
Net income - - - 54.5 - -
Issuance of new stock (4,179,626 $1.00 par common shares
and 856,237 exchangeable shares at $46.65 each) 4.2 39.9 190.8 - - -
Retraction of exchangeable shares (115,109 common
and exchangeable shares) 0.1 (5.6) 5.5 - - -
Dividends ($0.60 per share) - - - (30.9) - -
Stock options exercised (30,550 shares) - - 0.9 - - -
Tax benefit on exercise of stock options - - 0.3 - - -
Stock option compensation - - 1.4 - - -
Treasury stock used for dividend reinvestment plans
and to pay employee and director benefits - - - - - 0.6
Pension plan additional minimum liability - - - - (0.2) -
Unrealized gain (loss) on hedged
transactions - - - - (15.0) -
Foreign currency translation adjustment - - - - (2.6) -
------ ------------ ---------- -------- ------------- --------
Balance at September 30, 2001 $ 66.2 $ 97.8 $ 1,566.0 $ 833.2 $ (35.8) $ (486.4)
====== ============ ========== ======== ============= ========
See accompanying notes to consolidated financial statements
5
BOWATER INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in millions of US Dollars)
Nine Months Ended
--------------------------------
September 30, September 30,
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 54.5 $ 100.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and cost of timber harvested 228.6 217.0
Deferred income taxes 34.4 31.4
Minority interests in net income of subsidiaries 38.4 2.3
Net gain on sale of assets (83.5) (3.4)
Payments on maturity of hedging contracts (11.2) -
Changes in working capital:
Accounts receivable, net 28.4 (72.3)
Inventories 1.6 (7.7)
Accounts payable and accrued liabilities (58.1) (8.5)
Income taxes payable 1.6 11.5
Other, net (8.8) 2.3
------------- -------------
Net cash from operating activities 225.9 273.5
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Alliance Forest Products Inc. (251.0) -
Acquistion of Newsprint South, Inc., net of cash acquired - (379.6)
Cash invested in fixed assets, timber and timberlands (173.0) (164.5)
Purchase of assets previously leased - (24.2)
Disposition of fixed assets, timber and timberlands 5.6 5.9
Proceeds from sale of note receivable 122.6 -
Cash paid on maturity of economic hedging contracts - (20.2)
Cash invested in marketable securities (0.4) (50.7)
Cash from maturity of marketable securities 0.4 52.4
------------- -------------
Net cash used for investing activities (295.8) (580.9)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends, including minority interests (104.2) (38.0)
Purchase of common stock - (103.7)
Short-term financing 1,151.0 749.9
Short-term financing repayments (635.1) (276.3)
Long-term financing - 0.4
Purchases/payments of long-term debt (346.9) (30.9)
Stock options exercised 0.9 2.4
Other - 0.7
------------- -------------
Net cash from financing activities 65.7 304.5
------------- -------------
Net decrease in cash and cash equivalents (4.2) (2.9)
Cash and cash equivalents at beginning of year 20.0 24.7
------------- -------------
Cash and cash equivalents at end of period $ 15.8 $ 21.8
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, including capitalized interest of $7.1 and $2.0 $ 114.5 $ 90.6
Income taxes $ 14.7 $ 21.4
See accompanying notes to consolidated financial statements
6
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements include the accounts
of Bowater Incorporated and Subsidiaries as of September 30, 2001. The
consolidated balance sheets, statements of operations, capital accounts
and cash flows are unaudited. However, in the opinion of our
management, all adjustments (consisting of normal recurring
adjustments) necessary for fair presentation of the interim financial
statements have been made. The results of the interim period ended
September 30, 2001 are not necessarily indicative of the results to be
expected for the full year.
2. On April 1, 2001, Bowater signed a definitive agreement to acquire all
of the outstanding stock of Alliance Forest Products Inc. (Alliance)
for C$13.00 in cash plus .166 shares of Bowater Common Stock or
Exchangeable Shares for each Alliance common share. The Alliance
acquisition was completed on September 24, 2001. The results of
Alliance's operations have been included in the consolidated financial
statements since September 24, 2001. Following the acquisition, Bowater
changed Alliance's name to Bowater Canadian Forest Products Inc.
Alliance was an integrated company specializing in timber harvesting
and forest management, as well as the production and sale of newsprint,
uncoated groundwood papers, pulp, lumber and related products. Alliance
had operations in Canada and the United States. The acquisition adds
two modern, low-cost supercalendered and specialty paper mills in
Quebec and enables Bowater to offer a full spectrum of groundwood paper
grades. Also, a strategically located mill in Alabama, which is being
modernized to produce 100% recycled newsprint, enhances Bowater's
customer service capabilities. Alliance's extensive sawmill system and
strong fiber base will support Bowater's expanded operations.
The aggregate purchase price to Alliance shareholders was $485.9
million. The acquisition was financed through a $500.0 million Bridge
Credit Agreement dated July 2, 2001. The borrowings under this facility
matured on November 6, 2001 (See Note 15). As of September 24, 2001,
the closing date of the transaction, Alliance had a total of
approximately 30.3 million outstanding shares. Using the exchange ratio
of .166, the 30.3 million Alliance shares resulted in the issuance of
4,179,626 shares of Bowater Common Stock ($1.00 par value) and 856,237
shares of Bowater Exchangeable Shares (no par value) for the equity
consideration of $234.9 million and approximately $251.0 million in
cash for the cash portion. Bowater shares were valued at $46.65 per
share of Bowater Common Stock or Exchangeable Shares, which represents
a six-day average, three trading days prior to April 1, 2001 (the date
of the definitive agreement) and three trading days after. Transaction
costs of the acquisition were approximately $13.0 million and payments
to Alliance for settlement of stock options were approximately $8.1
million.
The acquisition is being accounted for using the purchase method of
accounting in accordance with Financial Accounting Standards No. 141,
"Business Combinations", whereby the total cost of the acquisition has
been allocated to the tangible and intangible assets acquired and
liabilities assumed based upon their respective fair values at the
effective date of the acquisition, September 24, 2001. The following
table summarizes the preliminary fair values of the assets acquired and
liabilities assumed at the date of acquisition. Independent appraisals
and actuarial valuations are being conducted and final allocations will
be made upon completion.
7
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF
SEPTEMBER 24,
(in millions) 2001
--------------
Purchase price to shareholders $ 485.9
Transaction costs 13.0
Payments to Alliance for settlement of stock options 8.1
--------------
Total purchase price $ 507.0
==============
Current assets $ 215.7
Timber and timberlands 4.4
Fixed assets, net 864.0
Other assets 10.4
--------------
Total assets acquired 1,094.5
Current liabilities 247.7
Long-term debt 198.4
Other long-term liabilities 141.4
--------------
Total liabilities assumed 587.5
Net assets acquired $ 507.0
==============
The following summarized unaudited pro forma financial information assumes the
Alliance acquisition had occurred on January 1 of each of the periods presented.
The summarized unaudited pro forma financial information does not purport to
represent what the results of operations or financial position of Bowater would
actually have been if the acquisition had in fact occurred on the assumed dates,
and we do not project the results of operations or financial position of Bowater
for any future date or period. The selected summarized unaudited pro forma
financial information does not reflect the cost savings and operating synergies
Bowater expects to realize in connection with the acquisition.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------
(In millions, except per share amounts) 2001 2000 2001 2000
-------------------------------------------------------------------------------------------
Sales $ 741.5 $ 864.9 $ 2,340.7 $ 2,442.4
Net income (loss) (4.1) 49.7 67.1 77.7
Basic earnings (loss) per common share (0.07) 0.88 1.19 1.35
Diluted earnings (loss) per common share (0.07) 0.87 1.18 1.34
3. During the first nine months of 2001, Bowater sold fixed assets and
land resulting in a pre-tax gain of $83.5 million, or $0.36 per diluted
share, after tax and minority interest. In the third quarter of 2001,
Bowater recognized a net pre-tax gain on the sale of assets of $4.3
million, or $0.05 per diluted share after tax.
In the second quarter of 2001, Bowater recognized a net pre-tax gain on
the sale of assets of $85.0 million, or $0.37 per diluted share, after
tax and minority interest. In the fourth quarter of 1999, Calhoun
Newsprint Company (CNC), a majority-owned subsidiary of Bowater, sold
approximately 140,000 acres of timberlands in North Carolina and South
Carolina for proceeds of $173.2 million (before expenses of $1.1
million). CNC received $26.2 million in cash and $145.9 million in
notes. We recorded the transaction as an installment sale and had
remaining deferred pre-tax gains of approximately $95.0 million. In the
second quarter of 2001, we sold the $145.9 million notes receivable for
net cash proceeds of $122.6 million, met the requirements for full
accrual, and recorded a net pre-tax gain of $84.5 million. The net
pre-tax gain was comprised of the $95.0 million previously recorded
deferred pre-tax gains and a $10.5 million loss on the sale of the
notes receivable. The $10.5 million loss on the sale of the notes
receivable was based on the original carrying amount of the notes,
allocated between the assets sold and the retained interests based on
its relative fair value at the date of
8
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the transfer. The principal variable in determining the fair value of
future expected cash flows of the retained interest is the discount
rate as it consists of two individual notes with a low level of credit
risk, contractually due in 13.5 years and not subject to prepayment.
The discount rates used for the two individual notes were 7.36% and
LIBOR plus 0.89, respectively. The retained interest of $12.5 million
at September 30, 2001 is included in Other Assets in the consolidated
balance sheet. A dividend of $60.1 million was paid to the minority
shareholder of CNC during the second quarter of 2001.
In April 2001, Bowater reached a final settlement of certain matters
regarding the sale of Great Northern Paper, Inc. (GNP) to Inexcon
Maine, Inc. (Inexcon). As a result, we recognized a pre-tax charge of
$5.8 million, or $0.07 per diluted share after tax, in the first
quarter of 2001.
During the first nine months of 2000, we sold fixed assets resulting in
a pre-tax gain of $3.4 million, or $0.04 per diluted share after tax.
4. Restructuring and environmental liabilities were recorded in connection
with the 1998 acquisition of Avenor Inc., the related closure of the
Gold River pulp mill and the sale of the Dryden white paper mill.
During the first nine months of 2001, we made payments against the
reserves of $0.7 million and reduced the reserves by $0.2 million due
to foreign exchange.
As of September 30, 2001, the remaining accrual for the above items is
$16.9 million. Of this remaining accrual, $3.6 million is included in
"Accounts payable and accrued liabilities" and $13.3 million is
included in "Other long-term liabilities" in the Consolidated Balance
Sheet. As of September 30, 2001, the cash requirements related to these
liabilities are expected to be less than $0.1 million during the
balance of 2001 and $16.8 million related to environmental matters in
2002 and beyond.
5. During the first nine months of 2001, the Board of Directors of CNC
declared dividends of $149.2 million. As a result, $73.1 million was
paid to the minority shareholder. In the first nine months of 2000, the
Board of Directors of CNC declared dividends of $12.5 million,
resulting in a payment of $6.1 million to the minority shareholder.
6. Bowater is involved in various legal proceedings relating to contracts,
commercial disputes, taxes, environmental issues, employment and
workers' compensation claims, and other matters. We periodically review
the status of these proceedings with both inside and outside counsel.
Our management believes that the ultimate disposition of these matters
will not have a material adverse effect on our operations or our
financial condition taken as a whole.
7. No stock purchases were made in the first nine months of 2001 under the
stock repurchase program authorized in May 1999. During the first nine
months of 2000, we purchased 2.1 million shares of our common stock for
$103.7 million. Since the beginning of this program, we have purchased
a total of 3.2 million shares of our common stock at a total cost of
$155.5 million.
8. "Other, net" in the Consolidated Statement of Operations includes the
following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
(In millions) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------
Foreign exchange (gain) loss $ (9.2) $ 2.2 $ (2.6) $ 7.5
(Income) loss from joint venture (1.4) -- (2.4) 1.8
Miscellaneous (income) expense (1.0) 0.1 (0.7) (1.2)
--------------------------------------------------------------------------------------------------
$ (11.6) $ 2.3 $ (5.7) $ 8.1
--------------------------------------------------------------------------------------------------
Bowater's foreign exchange gain or loss is primarily driven by the
revaluation of unhedged foreign denominated liabilities into US dollars
plus the ineffective portion of our cash flow hedges.
9
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. The calculation of basic and diluted earnings per share is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------
(In millions, except per share amounts) 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------
Basic Computation:
Net income (loss) $ (1.8) $ 50.0 $ 54.5 $ 100.9
----------------------------------------------------------
Basic income (loss) available to
common shareholders $ (1.8) $ 50.0 $ 54.5 $ 100.9
----------------------------------------------------------
Basic weighted average shares outstanding 52.0 51.6 51.7 52.6
----------------------------------------------------------
Basic earnings (loss) per common share $ (0.04) $ 0.97 $ 1.05 $ 1.92
----------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------------------
(In millions, except per share amounts) 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------
Diluted Computation:
Diluted income (loss) available to
common shareholders $ (1.8) $ 50.0 $ 54.5 $ 100.9
----------------------------------------------------------
Basic weighted average shares outstanding 52.0 51.6 51.7 52.6
Effect of dilutive securities:
Options - 0.5 0.4 0.5
----------------------------------------------------------
Diluted weighted average shares
outstanding 52.0 52.1 52.1 53.1
----------------------------------------------------------
Diluted earnings (loss) per common share $ (0.04) $ 0.96 $ 1.05 $ 1.90
----------------------------------------------------------
The effect of dilutive securities is not included in the computation
for the three months ended September 30, 2001 to prevent antidilution.
10. Segment Information:
On September 24, 2001, Bowater completed the purchase of Alliance. As a
result of the acquisition, we have four reportable segments effective
October 1, 2001: the Newsprint Division, the Coated and Specialty
Papers Division, the Forest Products Division and the Canadian Forest
Products Division. The Canadian Forest Products Division will operate
four manufacturing sites in Canada. Bowater acquired two of these sites
in connection with its acquisition of Alliance. The principal product
lines at these manufacturing sites are newsprint and uncoated
groundwood specialties. The Division will also be responsible for 10
sawmill operations in Quebec and New Brunswick and for the lumber sales
from all 12 Canadian sawmills. The Division will manage 400,000 acres
of timberland owned in Canada and about 24 million acres of Crown-owned
land in Canada on which Bowater has cutting rights. Alliance's
operating results for the seven days ended September 30, 2001 and the
asset balances at September 30, 2001 are included in "Corporate &
Eliminations" in the following tables.
10
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2001, Bowater had three reportable segments: the
Newsprint Division, the Coated Paper Division and the Forest Products
Division.
* The Newsprint Division is responsible for the manufacturing
operations of eight sites in the United States, Canada and
South Korea. It is also responsible for the worldwide
marketing of newsprint and uncoated groundwood specialties.
* The Coated Paper Division is responsible for one manufacturing
site that produces coated groundwood paper, newsprint, market
pulp and uncoated groundwood specialties and operates a
coating facility, both in the United States. This Division is
responsible for the worldwide marketing and sales of coated
groundwood paper.
* The Forest Products Division operates three sawmills and
manages 1.8 million acres of owned and leased timberlands in
the United States and Canada, as well as 14.1 million acres of
Crown-owned land in Canada on which we have cutting rights.
This Division sells wood fiber to the Newsprint and Coated
Paper Divisions, as well as markets and sells timber and
lumber to third parties in North America.
The Pulp Division has marketing and sales responsibility for all of our
market pulp products; however, the financial results from these sales
are included in both the Newsprint Division and the Coated Paper
Division, depending upon which site manufactures the product. The Pulp
Division's administrative expenses are included in "Corporate & other
eliminations." Accordingly, no separate results are reported for this
Division.
The following tables summarize information about segment profit and
loss and segment assets for the three and nine months ended September
30, 2001 and 2000:
(Unaudited, in millions)
Coated Forest Corporate
THREE MONTHS ENDED Newsprint Paper Products Other &
SEPTEMBER 30, 2001 Division Division Division Items Eliminations Total
------------------------------------------------------------------------------------------------------------------
Sales-including internal sales $ 391.6 $ 131.4 $ 97.8 $ - $ - $ 620.8
Elimination of intersegment sales - - - - (62.0) (62.0)
------------------------------------------------------------------------------------------------------------------
Sales - external customers 391.6 131.4 97.8 - (62.0) 558.8
------------------------------------------------------------------------------------------------------------------
Segment income (loss) 30.5 3.0 4.2 4.3 (19.8) 22.2
------------------------------------------------------------------------------------------------------------------
Total assets at 9/30/01 $ 3,369.0 $ 634.1 $ 370.5 $ - $ 1,481.8 $ 5,855.4
------------------------------------------------------------------------------------------------------------------
Coated Forest Corporate
THREE MONTHS ENDED Newsprint Paper Products Other &
SEPTEMBER 30, 2000 Division Division Division Items Eliminations Total
---------------------------------------------------------------------------------------------------------------------
Sales-including internal sales $ 493.0 $ 157.2 $ 107.4 $ - $ - $ 757.6
Elimination of intersegment sales - - - - (85.8) (85.8)
---------------------------------------------------------------------------------------------------------------------
Sales - external customers 493.0 157.2 107.4 - (85.8) 671.8
---------------------------------------------------------------------------------------------------------------------
Segment income (loss) 94.4 39.4 0.6 0.1 (15.9) 118.6
---------------------------------------------------------------------------------------------------------------------
Total assets at 9/30/00 $ 3,565.7 $ 518.8 $ 514.1 $ - $ 392.5 $ 4,991.1
---------------------------------------------------------------------------------------------------------------------
Coated Forest Corporate
NINE MONTHS ENDED Newsprint Paper Products Other &
SEPTEMBER 30, 2001 Division Division Division Items Eliminations Total
---------------------------------- ------------- ------------ ------------- ------------- --------------- -----------
Sales-including internal sales $ 1,303.5 $ 386.5 $ 278.1 $ - $ - $ 1,968.1
Elimination of intersegment sales - - - - (219.2) (219.2)
---------------------------------------------------------------------------------------------------------------------
Sales-external customers 1,303.5 386.5 278.1 - (219.2) 1,748.9
---------------------------------------------------------------------------------------------------------------------
Segment income (loss) $ 182.1 $ 25.8 $ 1.9 $ 83.5 $ (41.8) $ 251.5
---------------------------------------------------------------------------------------------------------------------
11
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Coated Forest Corporate
NINE MONTHS ENDED Newsprint Paper Products Other &
SEPTEMBER 30, 2000 Division Division Division Items Eliminations TotaL
---------------------------------------------------------------------------------------------------------------------
Sales-including internal sales $ 1,328.7 $ 443.3 $ 328.0 $ - $ - $ 2,100.0
Elimination of intersegment sales - - - - (257.6) (257.6)
---------------------------------------------------------------------------------------------------------------------
Sales-external customers 1,328.7 443.3 328.0 - (257.6) 1,842.4
---------------------------------------------------------------------------------------------------------------------
Segment income (loss) $ 196.6 $ 101.7 $ 18.4 $ 3.4 $ (55.8) $ 264.3
---------------------------------------------------------------------------------------------------------------------
During the first nine months of 2001, Bowater sold fixed assets and
land resulting in a pre-tax gain of $83.5 million, or $0.36 per diluted
share, after tax and minority interest. In the third quarter of 2001,
Bowater recognized a net pre-tax gain on the sale of assets of $4.3
million, or $0.05 per diluted share after tax. See footnote 3 for
details.
The line entitled "Segment income (loss)" in the preceding tables is
equal to "Operating income" as presented in our Consolidated Statement
of Operations. In addition, none of the income/expense items following
"Operating income" in our Consolidated Statement of Operations are
allocated to our segments, since they are reviewed separately by
Bowater's management. These items include, but are not limited to,
interest income and expense, provision for income tax expense, and
minority interests in net income (loss) of subsidiaries.
11. Effective January 1, 2001, Bowater adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended (SFAS 133). SFAS 133 establishes
accounting and reporting standards for derivative instruments and
hedging activities and requires that we record all derivatives as
either assets or liabilities in the balance sheet at fair value. There
were no transition amounts recorded upon the adoption of SFAS 133.
Bowater utilizes certain derivative instruments to enhance its ability
to manage risk relating to cash flow exposure. Derivative instruments
are entered into for periods consistent with related underlying cash
flow exposures and do not constitute positions independent of those
positions. We do not enter into contracts for speculative purposes;
however, we do have commodity and currency option contracts that are
not accounted for as accounting hedges. On the earlier of the date into
which the derivative contract is entered or the date of transition, we
designate the derivative as a cash flow hedge.
A significant portion of our operating expenses is paid in Canadian
dollars at our Canadian mill sites. To reduce our exposure to
differences in the US and Canadian dollar exchange rate fluctuations,
we enter into and designate Canadian dollar forward contracts to hedge
certain of our forecasted Canadian dollar cash outflows at the Canadian
mill operations.
Changes in the derivative fair values that are designated effective and
qualify as cash flow hedges will be deferred and recorded as a
component of "Accumulated other comprehensive income (loss)" until the
underlying transaction is recorded in earnings. When the hedged item
affects earnings, gains or losses are reclassified from "Accumulated
other comprehensive income (loss)" to the Consolidated Statement of
Operations on the same line as the underlying transaction (cost of
sales). The ineffective portion of a hedging derivative's change in
fair value is recognized immediately in earnings.
During the first nine months of 2001, we recorded the change in value
related to cash flow hedges amounting to a loss of $28.9 million ($17.9
million, after tax) in "Accumulated other comprehensive income (loss)."
Of this amount, $4.6 million ($2.9 million, after tax) was reclassified
from "Accumulated other comprehensive income (loss)" to earnings, which
was offset by net gains on the items being hedged. During the first
nine months of 2001, amounts that related to the ineffectiveness of our
hedging instruments were insignificant with the exception of the time
value element of the hedging instruments. This change in the time value
of the contracts is reported in earnings as exchange gain (loss) and
amounted to a loss of $2.3 million ($1.4 million, after tax) in the
first nine months of 2001. We expect to reclassify a $16.0 million loss
($9.9 million, after-tax) from "Accumulated other comprehensive income
(loss)" to earnings during the next twelve months as the hedged items
affect earnings.
12
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We formally document all relationships between hedging instruments and
hedged items, as well as our risk-management objectives and strategies
for undertaking various hedge transactions. We link all hedges that are
designated as cash flow hedges to forecasted transactions. The maximum
time period we have hedged transactions is two years. We also assess,
both at the inception of the hedge and on an on-going basis, whether
the derivatives that are used in hedging transactions are highly
effective in offsetting changes in cash flows of hedged items. When it
is determined that a derivative is not highly effective as a hedge, we
discontinue hedge accounting prospectively.
At September 30, 2001, we had $687.1 million of Canadian dollar
contracts. Information regarding the carrying value, fair market value,
and range of exchange rates of the contracts is summarized in the table
below:
(In millions) Liability (Asset)
------------------------- Notional ----------------- Range Of
Foreign Currency Exchange Amount of Carrying Fair US$/Canadian$
Agreements Derivatives Amount Market Value Exchange Rates
--------------------------------------------------------------------------------------------------------
Buy Currency:
--------------------------------------------------------------------------------------------------------
Canadian dollar
--------------------------------------------------------------------------------------------------------
Due in 2001 $ 94.8 $ 2.7 $ 2.7 .6706 - .6400
--------------------------------------------------------------------------------------------------------
Due in 2002 368.3 15.3 15.3 .6745 - .6346
--------------------------------------------------------------------------------------------------------
Due in 2003 224.0 5.5 5.5 .6560 - .6315
--------------------------------------------------------------------------------------------------------
Total $ 687.1 $ 23.5 $ 23.5 .6745 - .6315
--------------------------------------------------------------------------------------------------------
We also enter into certain commodity forward contracts that are not
designated as accounting hedges. These derivative instruments are
primarily intended to reduce volatility of prices for old newsprint and
magazines. During the first nine months of 2001, an after tax loss of
$0.6 million was recognized in earnings relating to these derivatives.
At September 30, 2001, we had commodity forward contracts with a
notional amount of 12,000 tons of old newspapers and old magazines, a
carrying value of $0.2 million and a fair market value of $0.2 million.
These commodity forward contracts are due in 2001.
In May 2001, we paid a premium of $0.6 million for $250 million of
Canadian dollar option contracts to cover the cash portion of
consideration to be paid to the shareholders of Alliance in connection
with the then-pending acquisition by Bowater. Due to the delayed
closing of the transaction, these options were subsequently settled in
July 2001 (original maturity date of August 31, 2001), resulting in a
pre-tax loss of approximately $0.4 million. In August 2001, we paid an
additional $0.9 million for Canadian dollar option contracts of $250
million to cover the Alliance acquisition. These contracts were settled
in September 2001, resulting in a pre-tax loss of approximately $0.8
million.
12. In the Consolidated Balance Sheet as of September 30, 2001, the line
entitled "Accumulated other comprehensive income (loss)" includes
$(24.3) million for cash flow hedges, $(17.2) million for pension plan
additional minimum liabilities, $(10.4) million for foreign currency
translation, and $16.1 million for taxes.
13. Certain prior-year amounts in the financial statements and the notes
have been reclassified to conform to the 2001 presentation.
14. During the first nine months of 2001, Bowater recognized a pre-tax
charge of $6.3 million due to pine beetle damage to its woodlands. The
continuing drought in the U.S. Southeast is contributing to conditions
that allow the southern pine beetle to flourish and expand the range of
its infestation. We have incurred pre-tax charges aggregating
approximately $14.0 million over the past five quarters as a result of
beetle damage. If these conditions continue, we may incur additional
beetle damage.
13
BOWATER INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. On November 6, 2001, Bowater's wholly-owned subsidiary, Bowater Canada
Finance Corporation, sold $600 million of ten-year notes, with a 7.95%
coupon, fully and unconditionally guaranteed by Bowater Incorporated.
The proceeds were used to repay in its entirety all amounts outstanding
under the $500 million Bridge Credit Agreement and the balance applied
to amounts outstanding under our 364-day and 5-year credit facilities.
The Bridge Credit Agreement was used to finance the cash portion of the
purchase price of the Alliance acquisition and the repayment of
Alliance's outstanding debt.
In October 2001, we entered into agreements to sell approximately
264,000 acres of non-strategic fee owned and leased timberlands in the
Southeast for approximately $230 million, consisting of cash and notes.
The transactions are subject to normal conditions including the
availability of financing, and are expected to close in the fourth
quarter of 2001.
14
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ORGANIZATION
On September 24, 2001, Bowater completed its acquisition of Alliance Forest
Products Inc. (Alliance), a Canadian pulp and paper company.
As a result of the acquisition, Bowater organized into five divisions
effective on October 1, 2001: the Newsprint Division, the Coated and Specialty
Papers Division, the Pulp Division, the Forest Products Division and the
Canadian Forest Products Division. Each division, with the exception of the Pulp
Division, is responsible for the sales and marketing of distinct product lines
and the operation of certain manufacturing sites.
The Pulp Division is primarily a marketing and distribution division.
Therefore, Bowater's financial results are collected, analyzed and reported
through the Newsprint, Coated and Specialty Papers, Forest Products and Canadian
Forest Products Divisions. However, only for the third quarter of 2001, all
sales and operating results for Alliance for the period of September 24 through
September 30, 2001 are included in "Corporate & eliminations." The following
discussion reflects the organization of Bowater before the closing of the
Alliance acquisition when Bowater was organized into four divisions: the
Newsprint Division, the Coated Paper Division, the Pulp Division and the Forest
Products Division.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
Statements in this report that are not reported financial results or other
historical information are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. They include, for example,
statements about our business outlook, assessment of market conditions,
strategies, future plans, future sales, prices for our major products, inventory
levels, capital spending and tax rates. These forward-looking statements are not
guarantees of future performance. They are based on management's expectations
that involve a number of business risks and uncertainties, any of which could
cause actual results to differ materially from those expressed in or implied by
the forward-looking statements. The risks and uncertainties relating to the
forward-looking statements in this report include those described under the
caption "Cautionary Statement Regarding Forward-Looking Information" in
Bowater's Current Report on Form 8-K dated October 23, 2001, and from time to
time, in Bowater's other filings with the Securities and Exchange Commission.
Bowater expressly declines any obligation to publicly update or revise any of
its forward-looking statements to reflect the occurrence of any subsequent
event.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001, VERSUS
SEPTEMBER 30, 2000
For the third quarter of 2001, Bowater had operating income of $22.2 million,
compared to $118.6 million for the third quarter of 2000. Operating income for
the third quarter of 2001 includes a net gain on the sale of assets of $4.3
million compared to a net gain on asset sales of $0.1 million for the third
quarter of 2000. Excluding these asset sales, operating income decreased $100.6
million. Lower transaction prices for pulp ($50.7 million) and coated groundwood
paper ($9.5 million) and lower shipments ($22.7 million, primarily from
market-related production curtailments (downtime) of newsprint and market pulp)
and higher operating costs account for the majority of this decrease. Higher
transaction prices for lumber ($2.2 million) partially offset this decrease.
Operating costs were higher as a result of maintenance and market-related
downtime ($30.8 million) and higher chemical costs ($4.2 million). These higher
operating costs were partially offset by lower recovered paper prices ($7.8
million) and a favorable Canadian dollar exchange ($10.7 million).
Net loss for the third quarter of 2001 was $1.8 million, or $0.04 per
diluted share, compared with net income of $50.0 million, or $0.96 per diluted
share, in the third quarter of 2000. Sales for the third quarter of 2001 were
$558.8 million compared with $671.8 million for the third quarter of 2000.
Presented below is a discussion of each significant product line
followed by a discussion of the results of each of the reported divisions.
15
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRODUCT LINE INFORMATION
SALES BY PRODUCT
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
(Unaudited, in millions) 2001 2000
----------------------------------------------------------
Sales:
Newsprint $ 322.9 $ 377.4
Market pulp 88.0 150.6
Coated groundwood 79.6 89.1
Uncoated groundwood
specialties 32.6 33.0
Lumber, timber and other
wood products 97.7 107.5
Corporate & Eliminations (62.0) (85.8)
--------------------------
Total sales $ 558.8 $ 671.8
--------------------------
Newsprint Bowater's average transaction price for newsprint slightly increased
in the third quarter of 2001 compared to the third quarter of 2000, and
decreased 7% compared to the second quarter of 2001. Our shipments for the third
quarter of 2001 decreased 15% compared to same period last year due to the
market and maintenance downtime taken in 2001. During the third quarter of 2001,
we took approximately 120,000 metric tons of downtime, of which 99,000 metric
tons were market-related and the balance was related to maintenance. We plan to
take an additional 120,000 metric tons of downtime in the fourth quarter of this
year. Our newsprint inventory increased 16% compared to the third quarter of
2000. As the United States economy weakened in the third quarter, total United
States newsprint demand and consumption declined. Newspaper advertising lineage
declined for the first eight months of 2001 compared to the same period a year
ago. North American mill inventories of newsprint increased and United States
customer inventories of newsprint decreased in September 2001 compared to
September 2000.
Market Pulp Bowater's average transaction price for market pulp decreased 37% in
the third quarter of 2001 compared to the third quarter of 2000, and decreased
6% compared to the second quarter of 2001. Our shipments decreased 9% compared
to the third quarter of 2000, and decreased 7% compared to the second quarter of
2001. Our market pulp inventories decreased during the third quarter to end the
quarter with 13 days of supply. World pulp markets remained weak during the
third quarter. NORSCAN (United States, Canada, Finland, Norway and Sweden)
producer pulp inventories decreased 232,000 metric tons during the third quarter
to end the quarter with 1.5 million metric tons, or 27 days of supply. Bowater
took approximately 35,000 metric tons of downtime, of which 28,000 metric tons
were market-related. We plan to take an additional 25,000 metric tons of
downtime in the fourth quarter of this year.
Coated Groundwood Bowater's average transaction price for coated groundwood
decreased 11% in the third quarter of 2001 compared to the third quarter of
2000. Our coated groundwood shipments for the third quarter of 2001 remained
virtually unchanged compared to the same period a year ago. Magazine advertising
decreased in the third quarter of 2001 compared to the third quarter of 2000.
United States mill inventories are below normal levels.
Lumber Bowater's average transaction price for lumber products increased 12% in
the third quarter of 2001 compared to the third quarter of 2000. Our shipments
for the third quarter of 2001 increased 15% compared to the same period last
year due primarily to the recently upgraded Oakhill Sawmill. Housing starts in
the third quarter were strong with over 1.5 million units in each month on a
seasonally adjusted basis. Actual housing starts increased 5% in the third
quarter of 2001 compared to the same period last year.
In August 2001, the US Department of Commerce imposed a countervailing
duty of 19.3% on all lumber shipments from Canada (with the exception of the
Maritimes provinces) into the US, retroactive to May, 2001, expiring December
2001. In November 2001, an additional antidumping duty of 12.6% was imposed on
all lumber shipments out of Canada into the US, effective immediately. Both of
these duties are temporary in nature, and are subject to final orders expected
to be issued in the second quarter of 2002.
Timber Bowater's average transaction price for timber decreased 9% in the third
quarter of 2001 compared to the third quarter of 2000. Our timber shipments
decreased 18% in the third quarter of 2001 compared to the same period a year
ago.
16
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DIVISIONAL PERFORMANCE
SALES BY DIVISION (1)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
(In millions) 2001 2000
----------------------------------------------------------
Newsprint Division $ 391.6 $ 493.0
Coated Paper Division 131.4 157.2
Forest Products Division 97.8 107.4
Corporate & eliminations (62.0) (85.8)
-----------------------
Total sales $ 558.8 $ 671.8
-----------------------
OPERATING INCOME (LOSS) BY DIVISION (1)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
(In millions) 2001 2000
----------------------------------------------------------
Newsprint Division $ 30.5 $ 94.4
Coated Paper Division 3.0 39.4
Forest Products Division 4.2 0.6
Other items 4.3 0.1
Corporate & eliminations (19.8) (15.9)
------------------------
Total operating income $ 22.2 $ 118.6
------------------------
(1) Financial results for the production and sale of market pulp are
included in the Newsprint Division or the Coated Paper Division,
depending upon which site manufactures the product. The Pulp Division
is responsible for the marketing and distribution of the product, and
its administrative expenses are included in "Corporate & eliminations."
For the period of September 24 through September 30, 2001, the sales
and operating results for Alliance are included in "Corporate &
eliminations."
Newsprint Division: Sales for the Division decreased $101.4 million for the
third quarter of 2001 compared to the third quarter of 2000. This decrease is
primarily the result of lower average transaction prices for market pulp ($35.5
million) and lower shipments of newsprint ($50.9 million), market pulp ($14.3
million), and uncoated groundwood specialties ($2.2 million). This decrease was
partially offset by higher average transaction prices for uncoated groundwood
specialties ($0.9 million) and newsprint ($0.5 million). See the previous
discussion of product line results.
Operating income for the third quarter of 2001 decreased $63.9 million
compared to operating income of $94.4 million for the third quarter of 2000.
This decrease is primarily the result of lower average transaction prices for
market pulp ($35.5 million) and lower shipments ($19.1 million, primarily
newsprint and market pulp). This decrease was partially offset by lower
distribution expenses ($2.0 million), higher average transaction prices for
uncoated groundwood specialties ($0.9 million) and newsprint ($0.5 million).
Operating costs increased in the third quarter of 2001 due to maintenance and
market-related downtime ($27.8 million), higher prices for fuel ($2.0 million)
and chemicals ($1.8 million), and higher labor and fringe costs ($2.3 million).
This increase was partially offset by lower prices for recovered paper ($7.8
million) and a favorable Canadian dollar exchange rate ($10.7 million).
Coated Paper Division: Sales for the Division decreased $25.8 million for the
third quarter of 2001 compared to the third quarter of 2000. This decrease is
due to lower average transaction prices for market pulp ($16.3 million), coated
groundwood paper ($8.6 million) and uncoated groundwood specialties ($0.6
million). See the previous discussion of product line results.
Operating income for the third quarter of 2001 decreased $36.4 million
compared with operating income of $39.4 million for the third quarter of 2000.
This decrease was primarily the result of lower average transaction prices for
market pulp ($16.3 million) and coated groundwood ($8.6 million). Operating
costs for the quarter were also higher due to maintenance downtime ($3.0
million), higher depreciation expenses ($1.0 million, due primarily to the press
section rebuild completed in the second quarter of 2001), labor and fringe
expenses ($1.4 million), selling expenses ($1.3 million), and higher prices for
chemicals ($2.4 million). These increases were partially offset by lower prices
for fuel ($1.1 million).
Forest Products Division: Sales for the Division decreased $9.6 million for the
third quarter of 2001 compared to the third quarter of 2000. This decrease is
primarily the result of lower timber shipments ($13.4 million). This decrease
was partially offset by higher transaction prices for lumber ($2.2 million) and
higher shipments for lumber ($2.3 million). See the previous discussion of
product line results.
Operating income for the third quarter of 2001 increased $3.6 million
to $4.2 million compared to operating income of $0.6 million for the third
quarter of 2000. Higher transaction prices for lumber ($2.2 million) and lower
operating costs ($1.4 million)
17
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
account for the majority of this decrease. Operating costs for the Division were
lower in the third quarter of 2001 compared to the same period last year due to
a lower charge for pine beetle damage ($2.6 million) offset partially by lower
timber production ($1.2 million).
The continuing drought in the U.S. Southeast is contributing to
conditions that allow the southern pine beetle to flourish and expand the range
of its infestation. Bowater has incurred charges aggregating approximately $14.0
million over the past five quarters as a result of beetle damage. If these
conditions continue, we may incur additional beetle damage.
Other Items: In the third quarter of 2001, Bowater recognized a net pre-tax gain
on the sale of assets of $4.3 million. In the third quarter of 2000, we sold
timberlands resulting in a pre-tax gain of $0.1 million.
Corporate & Eliminations: The elimination of intersegment sales decreased $8.7
million, comparing the third quarter of 2001 to the third quarter of 2000. Sales
for the three months ended September 30, 2001, also include $15.1 million
representing the sales for Alliance from September 24 to September 30, 2001.
Corporate expenses increased $3.9 million for the third quarter of 2001 compared
with the third quarter of 2000 due to hedging losses ($2.2 million, recorded as
exchange gain (loss) last year) and higher franchise taxes ($0.5 million).
INTEREST AND OTHER INCOME AND EXPENSES
Interest expense for the third quarter 2001 decreased $2.4 million compared to
the same period last year. This decrease was attributable to lower average debt
balances and lower interest rates on our short-term bank debt. This decrease was
slightly offset by an increase in debt as the result of the acquisition of
Alliance on September 24, 2001. Comparing the same periods, interest income
decreased $3.0 million due to lower average cash balances.
Also in the third quarter of 2001, Bowater recorded a foreign exchange
gain of $9.2 million compared to a foreign exchange loss of $2.2 million during
the third quarter of 2000. The majority of our exchange gain (loss) amounts is
attributable to the revaluation of unhedged foreign denominated liabilities into
US dollars plus the ineffective portion of our cash flow hedges.
Bowater's effective tax rate for the third quarter of 2001 was (116.1)%
versus 37.8% for the prior year's third quarter. The tax benefit in 2001 was the
result of benefits related to foreign currency exchange.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001, VERSUS
SEPTEMBER 30, 2000
For the first nine months of 2001, Bowater had operating income of $251.5
million compared to $264.3 million for the first nine months of 2000. Operating
income for the first nine months of 2001 includes a net gain on sale of assets
of $83.5 million compared to a net gain on sale of assets of $3.4 million for
the first nine months of 2000. Excluding these asset sales, operating income
decreased $92.9 million. Lower prices for market pulp ($98.1 million) and coated
groundwood ($11.9 million), lower shipments ($25.3 million, primarily newsprint
and market pulp), and higher operating costs, partially offset by higher
transaction prices for newsprint ($100.8 million) and uncoated groundwood
specialties ($4.2 million), account for the majority of this decrease. Higher
operating costs as a result of maintenance and market-related downtime ($68.9
million), higher fuel ($8.7 million) and chemical ($14.2 million) costs, an
increase in charges for beetle damage ($2.9 million) and hedging losses ($11.8
million, recorded as exchange gain (loss) last year) were partially offset by
lower prices for recovered paper ($16.3 million), a favorable Canadian dollar
exchange rate ($35.3 million), and lower selling, general and administrative
expenses ($10.2 million) primarily due to our stock-based compensation programs.
Net income for the first nine months of 2001 was $54.5 million, or
$1.05 per diluted share, compared with net income of $100.9 million, or $1.90
per diluted share, for the first nine months of 2000. Sales for the first nine
months of 2001 were $1,748.9 million compared with $1,842.4 million for the
first nine months of 2000.
Presented below is a discussion of each significant product line
followed by a discussion of the results of each of the reported divisions.
18
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRODUCT LINE INFORMATION
SALES BY PRODUCT
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
(Unaudited, in millions) 2001 2000
---------------------------------------------------------
Sales:
Newsprint $ 1,069.1 $1,012.1
Market pulp 294.4 434.0
Coated groundwood 232.8 246.7
Uncoated groundwood
specialties 93.8 79.2
Lumber, timber and other
wood products 278.0 328.0
Corporate & Eliminations (219.2) (257.6)
-------------------------
Total sales $ 1,748.9 $ 1,842.4
-------------------------
Newsprint For the first nine months of 2001, Bowater's average
transaction price for newsprint increased 10% compared to the first nine months
of 2000. Our shipments of newsprint were 4% lower compared to shipments for the
first nine months of 2000 due to market downtime offset partially by the
acquisition of Grenada. Total United States demand and consumption of newsprint
decreased in the first nine months of 2001 compared to the first nine months of
2000. North American mill inventories increased and United States customer
inventories decreased, comparing the end of September 2001 levels to the end of
September 2000. North American offshore exports and United States imports of
newsprint decreased for the first nine months of 2001 compared to the first
nine months of 2000.
Market Pulp The average transaction price for Bowater's market pulp for
the first nine months of 2001 decreased 25% compared to the first nine months
of 2000. Our shipments of market pulp decreased 11% over the year ago period.
NORSCAN (United States, Canada, Finland, Norway and Sweden) market pulp
shipments for the first nine months of 2001 decreased 9% compared to the first
nine months of 2000. NORSCAN producers took market-related downtime resulting
in an 83% operating rate for the first nine months of 2001 compared to 97% a
year ago.
Coated Groundwood Bowater's average transaction price for coated
groundwood paper decreased 5% in the first nine months of 2001 compared to the
first nine months of 2000. Our shipments of coated groundwood paper were
slightly lower compared to shipments for the nine months of 2000. For the
industry, United States coated groundwood paper shipments were 1% lower
compared to the first nine months of 2000. Coated groundwood paper inventory
held by the United States mills at the end of September 2001 decreased 18%
compared to the end of September 2000.
Lumber For the first nine months of 2001, Bowater's average transaction
price for lumber decreased 2% compared to the first nine months of 2000. Our
shipments of lumber were down 14% compared to the first nine months of 2000 as
a result of market-related curtailments and downtime for capital improvements.
This decrease was partially offset by higher production at the recently
modernized Oakhill Sawmill.
In August 2001, the US Department of Commerce imposed a countervailing
duty of 19.3% on all lumber shipments from Canada (with the exception of the
Maritimes provinces) into the US, retroactive to May, 2001, expiring in December
2001. In November 2001, an additional antidumping duty of 12.6% was imposed on
all lumber shipments out of Canada into the US, effective immediately. Both of
these duties are temporary in nature, and are subject to final orders expected
to be issued in the second quarter of 2002.
Timber Bowater's shipments of timber products were down 23% in the first
nine months of 2001 compared to the first nine months of 2000. The average
transaction price for timber decreased 9% from the year-ago period, primarily
the result of weak timber markets in the South.
DIVISIONAL PERFORMANCE
SALES BY DIVISION (1)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
(In millions) 2001 2000
----------------------------------------------------------
Newsprint Division $ 1,303.5 $1,328.7
Coated Paper Division 386.5 443.3
Forest Products Division 278.1 328.0
Corporate & eliminations (219.2) (257.6)
-----------------------
Total sales $ 1,748.9 $ 1,842.4
-----------------------
19
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING INCOME (LOSS) BY DIVISION (1)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
(In millions) 2001 2000
---------------------------------------------------------
Newsprint Division $ 182.1 $ 196.6
Coated Paper Division 25.8 101.7
Forest Products Division 1.9 18.4
Other items 83.5 3.4
Corporate & eliminations (41.8) (55.8)
------------------------
Total operating income $ 251.5 $ 264.3
------------------------
(1) Financial results for the production and sale of market pulp are
included in the Newsprint Division or the Coated Paper Division,
depending upon which site manufactures the product. The Pulp Division
is responsible for the marketing and distribution of the product, and
its administrative expenses are included in "Corporate & eliminations."
For the period of September 24 through September 30, 2001, the sales
and operating results for Alliance are included in "Corporate &
eliminations."
Newsprint Division: Sales for the Division decreased $25.2 million for the first
nine months of 2001 compared to the first nine months of 2000. This decrease is
primarily the result of lower average transaction prices for market pulp ($79.5
million) and lower shipments of market pulp ($34.4 million) and newsprint ($25.7
million). This decrease was partially offset by higher average transaction
prices for newsprint ($106.1 million) and uncoated groundwood specialties ($4.1
million) and higher uncoated groundwood specialty shipments ($3.8 million). See
the previous discussion of product line results.
Operating income for the first nine months of 2001 decreased $14.5
million compared with operating income of $196.6 million for the first nine
months of 2000. Lower average transaction prices for market pulp ($79.5
million), lower shipments ($18.0 million, primarily newsprint and market pulp),
and higher operating costs account for the majority of this decrease. These
decreases were partially offset by higher transaction prices for newsprint
($106.1 million) and uncoated groundwood specialties ($4.1 million). Operating
costs for the division increased in the nine months of 2001 due to maintenance
and market-related downtime ($50.4 million), higher prices for fuel ($8.7
million) and chemicals ($5.8 million), higher labor and fringe costs ($6.8
million), higher property costs ($2.9 million), higher kraft usage ($1.8
million) and higher repair materials ($1.3 million). This increase was partially
offset by lower recovered paper prices ($16.3 million) and a favorable Canadian
dollar exchange rate ($35.3 million).
Coated Paper Division: Sales for the Division decreased $56.8 million for the
first nine months of 2001 compared to the first nine months of 2000, due to
lower average transaction prices for market pulp ($30.8 million) and coated
groundwood paper ($11.4 million) and lower shipments of newsprint ($17.5
million), market pulp ($6.3 million) and coated groundwood ($2.3 million). This
decrease was partially offset by higher transaction prices for newsprint ($6.1
million) and uncoated groundwood specialties ($1.4 million) and higher shipments
of uncoated groundwood specialties ($4.2 million). See the previous discussion
of product line results.
Operating income decreased $75.9 million for the first nine months of
2001 compared to the first nine months of 2000. This decrease was primarily the
result of lower transaction prices for market pulp ($30.8 million) and coated
groundwood paper ($11.4 million), lower shipments ($6.9 million, primarily
newsprint and pulp). Operating costs were also higher due to maintenance and
market-related downtime ($18.5 million), higher prices for chemicals ($8.4
million) and higher selling expenses ($2.0 million). This decrease was partially
offset by higher transaction prices for newsprint ($6.1 million) and uncoated
groundwood specialties ($1.4 million).
Forest Products Division: Sales for the Division decreased $49.9 million for the
first nine months of 2001 compared to the first nine months of 2000. This
decrease is primarily the result of lower lumber ($6.8 million) and timber
($38.6 million) shipments and lower timber transaction prices ($3.7 million).
See the previous discussion of product line results.
Operating income for the Division decreased $16.5 million for the first
nine months of 2001 compared to the first nine months of 2000, due primarily to
lower timber ($3.7 million) and lumber ($0.7 million) transaction prices and
lower shipments ($3.2 million, primarily timber). Operating costs for the
Division were higher in the nine months of 2001 compared to the same period last
year due to a charge for pine beetle damage ($2.9 million) and higher prices for
wood purchased from third party landowners ($4.0 million). Operating costs were
also negatively impacted by the startup of two recently modernized sawmills.
20
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The continuing drought in the U.S. Southeast is contributing to
conditions that allow the southern pine beetle to flourish and expand the range
of its infestation. Bowater has incurred charges aggregating approximately $14.0
million over the past five quarters as a result of beetle damage. If these
conditions continue, we may incur additional beetle damage.
Other Items: In the first nine months of 2001, Bowater recognized a net pre-tax
gain on the sale of assets of $83.5 million. This gain is primarily the result
of the sale of notes receivable and recognition of deferred income (previously
in Other Long-term Liabilities) related to a 1999 installment sale of
timberlands during the second quarter of 2001. The pre-tax gain on this sale was
$84.5 million ($19.2 million after tax and minority interest). In April 2001, we
reached a final settlement in connection with the sale of GNP to Inexcon. As a
result, we recognized a pre-tax charge of $5.8 million in the first quarter of
2001. In the first nine months of 2000, we sold assets and timberlands resulting
in a pre-tax gain of $3.4 million.
Corporate & Eliminations: The elimination of intersegment sales decreased $23.3
million, comparing the first nine months of 2001 to the first nine months of
2000. Sales for the first nine months of 2001 also include the sales of the
recently acquired Alliance of $15.1 million. Corporate expenses decreased $14.0
million primarily due to credits recognized for stock-based compensation ($14.5
million) in the first nine months of 2001 and higher benefit costs ($10.1
million) in the first six months of 2000. These lower expenses were partially
offset by the recognition of hedging losses ($11.8 million) in the first nine
months of 2001.
INTEREST AND OTHER INCOME AND EXPENSES
Interest expense for the first nine months of 2001 increased $3.9 million over
the same period in 2000. This increase was attributable to higher borrowings on
our credit facility due to the acquisition of the Grenada operations in August
2000. Comparing the same periods, interest income decreased $4.1 million due to
lower average cash balances.
Also in the first nine months of 2001, Bowater recorded a foreign
exchange gain of $2.6 million compared to a loss of $7.5 million during the
prior period. The majority of our exchange gain (loss) amounts is attributable
to the revaluation of unhedged foreign denominated liabilities into US dollars
plus the ineffective portion of our cash flow hedges.
Bowater's effective tax rate for the first nine months of 2001 was
42.7% compared to 39.0% for the first nine months of 2000. The higher rate in
2001 was the result of a partially taxable dividend received as a result of the
sale of a note receivable.
Minority interests in the net income of subsidiaries for the first nine
months of 2001 increased $36.1 million due primarily to the sale of a note
receivable and recognition of deferred income (previously in Other Long-term
Liabilities) related to a 1999 installment sale of timberlands.
LIQUIDITY AND CAPITAL RESOURCES
Bowater's cash and cash equivalents decreased $4.2 million to $15.8 million at
September 30, 2001 compared to December 31, 2000. We generated cash from
operations of $225.9 million, used cash of $295.8 million for investing
activities, and received cash of $65.7 million from financing activities. Our
most significant cash transactions during the first nine months of 2001 include
cash flow from operations, the purchase of Alliance, capital expenditures, the
sale of notes receivable, dividends and financing activities.
CASH FROM OPERATING ACTIVITIES:
During the first nine months of 2001, Bowater's operations generated $225.9
million of cash compared to $273.5 million of cash during the first nine months
of 2000, a decrease of $47.6 million. Lower net income and cash paid of $11.2
million on the maturity of Canadian dollar hedging contracts accounted for the
majority of the decrease in 2001. For the first nine months of 2000, the cash
paid for the maturity of Canadian dollar hedging contracts is included under
Cash from Investing Activities.
CASH FROM INVESTING ACTIVITIES:
Cash used for investing activities during the first nine months of 2001 totaled
$295.8 million, compared with a use of $580.9 million during the nine months of
2000. In June 2001, we received $122.6 million from the sale of notes
receivable. Capital expenditures for the first nine months of 2001 were $8.5
million higher than the same period last year, due primarily to the construction
of a new fiber line at our Catawba location. We acquired Alliance during the
first nine months of 2001 requiring cash of $251.0 million.
21
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the first nine months of 2000, we acquired the Grenada operations
requiring cash of $379.6 million. We also paid cash of $20.2 million on the
maturity of Canadian dollar hedging contracts during 2000. For the first nine
months of 2001, the cash paid for the maturity of Canadian dollar hedging
contracts is included under Cash from Operating Activities.
CASH FROM FINANCING ACTIVITIES:
Cash from financing activities was $65.7 million for the first nine months of
2001 compared to $304.5 million during the first nine months of 2000. During the
first nine months of 2001, Bowater received $515.9 million (net of payments of
$635.1 million) from its short-term credit facilities. Most of these proceeds
were from a new $500.0 million nine- month bridge loan used to fund the Alliance
acquisition and to refinance assumed debt. On November 6, 2001, Bowater's
wholly-owned subsidiary, Bowater Canada Finance Corporation, sold $600 million
of ten-year notes, with a 7.95% coupon, fully and unconditionally guaranteed by
Bowater Incorporated. The proceeds were used to repay in its entirety all
amounts outstanding under the $500 million Bridge Credit Agreement and the
balance applied to amounts outstanding under our 364-day and 5-year credit
facilities. During the first nine months of 2000, we borrowed $473.6 million
using our short-term credit facilities. During the first nine months of 2001, we
reduced the amount of our 364-day credit facility from $750 million to $450
million, while retaining our $350 million, five-year facility. In October 2001,
Bowater's wholly-owned subsidiary, Bowater Pulp & Paper Canada Inc., opened a
new $100 million, 364-day facility. Also during the first nine months of 2001,
we made payments on long-term borrowings amounting to $346.9 million. During the
first nine months of the prior year, we repurchased a portion of our 9.25%
Debentures due 2002 for $20.8 million. Other payments on our long-term
borrowings during the first nine months of 2000 were $10.1 million for a total
of $30.9 million.
Cash dividends paid in the first nine months of 2001 increased $66.2
million from the prior year period due primarily to dividend payments to the
minority shareholder of Calhoun Newsprint Company.
During 1999, the Board of Directors authorized a stock repurchase
program allowing us to buy back up to 5.5 million shares of our outstanding
common stock. We made no purchases under this program during the first nine
months of 2001. During the first nine months of 2000, we purchased 2.1 million
shares at a cost of $103.7 million. Since the beginning of the program, we
purchased 3.2 million shares at a total cost of $155.5 million.
We continually consider various options for the use of our cash,
including internal capital investments, share repurchases, investments to grow
our businesses and additional debt reductions.
ACQUISITION
On April 1, 2001, Bowater signed a definitive agreement to acquire all of the
outstanding stock of Alliance for C$13.00 in cash plus .166 shares of Bowater
Common Stock or Exchangeable Shares for each Alliance common share. The Alliance
acquisition was completed on September 24, 2001. The results of Alliance's
operations have been included in the consolidated financial statements since
September 24, 2001. Following the acquisition, Bowater changed Alliance's name
to Bowater Canadian Forest Products Inc. Alliance was an integrated company
specializing in timber harvesting and forest management, as well as the
production and sale of newsprint, uncoated groundwood papers, pulp, lumber and
related products. Alliance had operations in Canada and the United States. The
acquisition adds two modern, low-cost supercalendered and specialty paper mills
in Quebec and enables Bowater to offer a full spectrum of groundwood paper
grades. Also, a strategically located mill in Alabama, which is being modernized
to produce 100% recycled newsprint, enhances Bowater's customer service
capabilities. Alliance's extensive sawmill system and strong fiber base will
support Bowater's expanded operations.
The aggregate purchase price to Alliance shareholders was $485.9
million. As of September 24, 2001, the closing date of the transaction, Alliance
had a total of approximately 30.3 million outstanding shares. Using the exchange
ratio of .166, the 30.3 million Alliance shares resulted in the issuance of
4,179,626 shares of Bowater Common Stock ($1.00 par value) and 856,237 shares of
Bowater Exchangeable Shares (no par value) for the equity consideration of
$234.9 million and approximately $251.0 million in cash for the cash portion.
Bowater shares were valued at $46.65 per share of Bowater Common Stock or
Exchangeable Shares, which represents a six-day average, three trading days
prior to April 1, 2001 (the date of the definitive agreement) and three trading
days after. Transaction costs of the acquisition were approximately $13.0
million and payments to Alliance for settlement of stock options were
approximately $8.1 million.
22
BOWATER INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The acquisition is being accounted for using the purchase method of
accounting in accordance with Financial Accounting Standards No. 141, "Business
Combinations", whereby the total cost of the acquisition has been allocated to
the tangible and intangible assets acquired and liabilities assumed based upon
their respective fair values at the effective date of the acquisition, September
24, 2001. The Consolidated Balance Sheet at September 30, 2001 includes the
preliminary fair values of the assets acquired and liabilities assumed at the
date of acquisition. Independent appraisals and actuarial valuations are being
conducted and final allocations will be made upon completion.
SUBSEQUENT EVENTS
In October 2001, Bowater signed agreements to sell approximately 264,000 acres
of non-strategic fee owned and leased timberlands in the Southeast for
approximately $230 million, or $870 per acre, consisting of cash and notes. The
transactions are subject to normal conditions including the availability of
financing, and are expected to close in the fourth quarter of 2001.
Also in October 2001, Bowater announced its decision to permanently
close a 90,000 metric ton per year, high cost newsprint machine at the recently
acquired Coosa Pines, Alabama mill by January 31, 2002. In connection with the
closure of this machine and other equipment at the mill, Bowater will eliminate
approximately 300 jobs, or about 30% of the mill's workforce.
On November 6, 2001, Bowater's wholly-owned subsidiary, Bowater Canada
Finance Corporation, sold $600 million of ten-year notes, with a 7.95% coupon,
fully and unconditionally guaranteed by Bowater Incorporated. The proceeds were
used to repay in its entirety all amounts outstanding under the $500 million
Bridge Credit Agreement and the balance applied to amounts outstanding under our
364-day and 5-year credit facilities. The Bridge Credit Agreement was used to
finance the cash portion of the purchase price of the Alliance acquisition and
the repayment of Alliance's outstanding debt.
On November 12, 2001, Bowater announced that it will take approximately
23 million board feet of downtime at our sawmills in Quebec in the fourth
quarter of 2001. We will continue to assess the economic viability of our
sawmills for possible future downtime or permanent closures.
ACCOUNTING STANDARDS
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." Bowater
adopted this Standard on April 1, 2001, and accounts for transactions relating
to the Standard in accordance with its provisions.
In July 2001, the FASB issued Statement No. 141, "Business
Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets."
Statement 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, as well as all purchase
method business combinations completed after June 30, 2001. The Alliance
acquisition will be accounted for under Statement 141. Under Statement 142,
goodwill and intangible assets with indefinite useful lives will no longer be
amortized, but will be tested for impairment at least on an annual basis in
accordance with the provisions of Statement 142. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will continue to
be amortized prior to the adoption of Statement 142. Bowater is required to
adopt the provisions of Statement 141 immediately. Bowater is required to adopt
Statement 142 on January 1, 2002. As of September 30, 2001, Bowater has
unamortized goodwill in the amount of $848.9 million. Amortization expense for
the three and nine months ended September 30, 2001 was $6.0 million and $17.9
million, respectively. Because of the extensive effort needed to comply with
adopting Statement 142, it is not practicable to reasonably estimate the impact
of adopting this Statement on our financial statements at the date of this
report, including whether any transitional impairment losses will be required to
be recognized as the cumulative effect of a change in accounting principle.
In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligation." This Statement requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. Statement 143 is effective for fiscal years beginning after June
15, 2002. Bowater will adopt the Statement effective January 1, 2003 and is
currently assessing the impact on its operations.
On October 3, 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001 (January
2002 for Bowater). The FASB's new rules on asset impairment supersede FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived
23
Assets to Be Disposed Of", and provide a single accounting model for long-lived
assets to be disposed of. Bowater will adopt the Statement effective January 1,
2002 and is currently assessing the impact on its operations.
ITEM 3. MARKET RISK
Bowater's market risk disclosure included in its Current Report on Form 8-K
dated October 23, 2001, is still applicable as of this filing. We have updated
the disclosure concerning our Canadian dollar forward contracts and included
additional disclosure on our commodity and currency option contracts, which is
included in Footnote 11 in this Form 10-Q.
24
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
In connection with the Company's acquisition of Alliance Forest
Products Inc. on September 24, 2001 the Company issued an aggregate of 4,179,626
shares of its common stock to Alliance shareholders, and the Company's
subsidiary, Bowater Canada, Inc., issued an aggregate of 856,237 Exchangeable
Shares to the former Alliance shareholders. The Exchangeable Shares are
exchangeable, at the option of the holder, into shares of Bowater Common Stock
on a one-for-one basis. The shares were issued pursuant to an order of
arrangement approved by the Superior Court of Quebec, District of Montreal in
exchange for all of the outstanding shares of common stock of Alliance.
Accordingly, the issuance was exempt from registration pursuant to Section
3(a)(10) of the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits (numbered in accordance with Item 601 of Regulation
S-K):
Exhibit No. Description
----------- -----------
10.1 Credit Agreement dated as of October 26, 2001 between
Bowater Pulp and Paper Canada Inc. (as Borrower),
Bowater Incorporated (as Guarantor), the Bank of Nova
Scotia (as Administrative Agent) and the Banks from
Time to Time Parties Thereto.
10.2 Purchase Agreement (the "Purchase Agreement") dated
as of October 31, 2001 by and among Bowater Canada
Finance Corporation, Bowater Incorporated, Goldman,
Sachs & Co., and J.P. Morgan Securities Inc., as
representatives of the several purchasers named in
Schedule I thereto.
10.3 Indenture dated as of October 31, 2001 by and among
Bowater Canada Finance Corporation (as Issuer),
Bowater Incorporated (as Guarantor) and The Bank of
New York (as Trustee).
10.4 Exchange and Registration Rights Agreement dated as
of November 6, 2001 by and among Bowater Canada
Finance Corporation, Bowater Incorporated, Goldman,
Sachs & Co., and J.P. Morgan Securities Inc., as
representatives of the several purchasers named in
Schedule I to the Purchase Agreement.
10.5 Employment Agreement dated as of September 24, 2001,
by and between the Company and Pierre Monahan.
25
10.6 Change in Control Agreements, each dated as of
September 24, 2001, by and between the Company and
each of Pierre Monahan, Georges Cabana, Daniel
Laberge, Jean S. Lebel, Jean-Marc Simard, Daniel
Tardif and Kevin B. Wassil.
10.7 Change in Control Agreement, dated as of June 11,
2001, by and between the Company and Walter L.
Brunson.
10.8 First Amendment to Agreement dated July 24, 1998 by
and between the Company and David J. Steuart.
(b) Reports on Form 8-K:
On October 9, 2001, the Company filed a report on Form 8-K
disclosing the completed acquisition of Alliance Forest
Products Inc. on September 24, 2001.
On October 23, 2001, the Company filed a report on Form 8-K
disclosing cautionary statements identifying important factors
that could cause the Company's actual results to differ
materially from those contained in forward-looking statements
made by or on behalf of the Company.
On October 25, 2001, the Company filed an Amendment No. 2 to a
report on Form 8-K dated April 2, 2001 to disclose unaudited
pro forma combined financial statements of Bowater for the
year ended December 31, 2001, and as of and for the
three-month period ended March 31, 2001, that give effect to
the acquisition of Alliance Forest Products Inc.
On October 26, 2001, the Company filed an Amendment No. 1 to a
report on Form 8-K dated September 24, 2001 to disclose
unaudited pro forma condensed combined financial statements of
Bowater for the year ended December 31, 2001, and as of and
for the six-month period ended June 30, 2001 that give effect
to the acquisition of Alliance Forest Products Inc.
26
BOWATER INCORPORATED AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOWATER INCORPORATED
By /s/ David G. Maffucci
----------------------
David G. Maffucci
Senior Vice President and
Chief Financial Officer
By /s/ Michael F. Nocito
---------------------
Michael F. Nocito
Vice President and Controller
Dated: November 14, 2001
27
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
----------- -----------
10.1 Credit Agreement dated as of October 26, 2001 between
Bowater Pulp and Paper Canada Inc. (as Borrower),
Bowater Incorporated (as Guarantor), the Bank of Nova
Scotia (as Administrative Agent) and the Banks from
Time to Time Parties Thereto.
10.2 Purchase Agreement (the "Purchase Agreement") dated
as of October 31, 2001 by and among Bowater Canada
Finance Corporation, Bowater Incorporated, Goldman,
Sachs & Co., and J.P. Morgan Securities Inc., as
representative s of the several purchasers named in
Schedule I thereto.
10.3 Indenture dated as of October 31, 2001 by and among
Bowater Canada Finance Corporation (as Issuer),
Bowater Incorporated (as Guarantor) and The Bank of
New York (as Trustee).
10.4 Exchange and Registration Rights Agreement dated as
of November 6, 2001 by and among Bowater Canada
Finance Corporation, Bowater Incorporated, Goldman,
Sachs & Co., and J.P. Morgan Securities Inc., as
representatives of the several purchasers named in
Schedule I to the Purchase Agreement.
10.5 Employment Agreement dated as of September 24, 2001,
by and between the Company and Pierre Monahan.
10.6 Change in Control Agreements, each dated as of
September 24, 2001, by and between the Company and
each of Pierre Monahan, Georges Cabana, Daniel
Laberge, Jean S. Lebel, Jean-Marc Simard, Daniel
Tardif and Kevin B. Wassil.
10.7 Change in Control Agreement, dated as of June 11,
2001, by and between the Company and Walter L.
Brunson.
10.8 First Amendment to Agreement dated July 24, 1998 by
and between the Company and David J. Steuart.